Free Cash Flow
The amount of cash generated by the business after covering its capital expenditures and working capital needs. It's the money actually available to repay debt, pay dividends, or reinvest.
Definition
Free cash flow (FCF) represents the cash a business generates after paying all its operating expenses and its capital investments (equipment, machinery, vehicles, etc.). The simplified formula: EBITDA minus taxes, minus capital expenditures, minus changes in working capital.
In French-language Quebec documentation, you’ll see flux de trésorerie libre used for the same concept.
Unlike net income or EBITDA, FCF reflects the actual cash available. A business can be profitable on paper while still running short on cash if it constantly has to reinvest in its equipment or fund growth in its accounts receivable.
Why free cash flow matters in a business sale
FCF is often considered the most reliable indicator of a business’s real value. EBITDA paints a picture of operational performance, but FCF shows what’s left in the bank account at the end of the year.
For a buyer, it’s with FCF that they repay the acquisition loan — not with EBITDA.
For you as a seller, understanding your FCF is essential for two reasons. First, it serves as the basis for the discounted cash flow (DCF) valuation method, a common approach for mid-sized Quebec SMEs.
Second, a significant gap between EBITDA and FCF — for example an EBITDA of $600,000 but an FCF of only $200,000 — will be spotted immediately by the buyer and their advisors. That gap signals high reinvestment needs, which reduces the perceived value.
If your business generates robust and predictable FCF, you have a powerful selling point. It means the buyer can finance the acquisition comfortably.
That translates into a higher price and more favourable financing terms.
What every seller should know
- High EBITDA but low FCF is a warning signal for buyers — it points to a business that “eats” its profits in reinvestment.
- Documenting your FCF over 3 to 5 years lets you demonstrate consistency and predictability in cash generation.
- Deferred capital expenditures (aging equipment not replaced) artificially inflate FCF — buyers will adjust downward.
- FCF is the real ceiling on what a buyer can pay, because that’s the cash they’ll use to repay the acquisition financing.